Why the Santos Ltd share price is crashing today

Credit: greig davidson

Shares of energy producer Santos Ltd (ASX: STO) have continued to plummet in price today, falling another 7.7% to trade at $2.65. They hit a low of just $2.61 earlier in the session, down a staggering 29% since the beginning of 2016.

So What: Santos’ share price is getting smashed as a result of crashing oil prices, which are leading many analysts to frantically reassess their forecasts and price targets for businesses. Oil prices have fallen more than 70% since mid-2014 but their decline has been particularly violent in the early stages of 2016, sliding to their lowest levels in 12 years. Brent oil, for instance, is currently fetching less than US$29 a barrel.

Just last week, Standard & Poor’s reduced its long-term price assumption for the resource to just US$50 a barrel, down from a more optimistic US$70, which could put Santos’ credit rating at risk. Santos’ rival Woodside Petroleum Limited (ASX: WPL) is also in a precarious position, while impairments are possible outcomes for both businesses following BHP Billiton Limited’s (ASX: BHP) US$7.2 billion write-down just last week.

For Santos, that could include its Gladstone LNG project in Queensland which somehow escaped any write-downs in February 2015, when Santos booked $1.6 billion of after-tax impairments across the business.

Now What: Companies across the entire sector are suffering today as a result of the 6.3% decline in the Brent oil price on Friday, with Sundance Energy Australia Ltd (ASX: SEA) and Origin Energy Ltd (ASX: ORG) also crashing 13.9% and 5.7%, respectively.

Although some investors might be attracted to the ‘cheap’ share prices currently on offer; there is certainly the potential for these companies to fall even further over the coming months if oil prices do continue to decline. Gaining exposure to the sector would involve enormous downside risk which investors should always consider before buying.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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